Yahoo!'s Core Business Still Worth Less Than Nothing As Alibaba Revalues Before IPO

There's still something of a puzzle about the valuation being applied to
Yahoo! by the market. For even as Alibaba firms up its own internal estimates of its value before its looming IPO the stock price of Yahoo! still doesn't fully reflect that value. Indeed, so much does it not reflect that full value that the actual market valuation of Yahoo!'s core business is negative. This has been going on for some time now as well so it's not just some temporary blip in the way that the market is not taking account of matters. There's something more going on here.

The latest news from Alibaba is that it is valuing itself at some $130 billion in the run up to that IPO:

Alibaba, China’s online shopping giant, has boosted its estimated value to $130bn ahead of what is expected to be one of the largest initial public offerings ever seen.

The 15-year-old retail business raised its value from $116bn in an updated prospectus filed with the US Securities and Exchange Commission on Friday night.

Yahoo! owns 24 % of Alibaba so it owns stock worth $31.2 billion. As we've mentioned around here before (and also here) Yahoo also owns a stake in
Yahoo Japan worth some $11 billion and has several billion in cash on its balance sheet (net cash that is, not offset by debt).

Yet the total market value of Yahoo! on Friday was only some $36 billion.

You can see that this doesn't quite make sense. There's $42 billion of value in the Alibaba and Yahoo Japan stakes plus those few billion in cash meaning that the core Yahoo! business, the one we all actually use, appears to have a market value of negative $8 to $10 billion.

There are a number of sensible financial market and economic reasons for the existence of this discount, of course there are. We still don't know the real value of Alibaba for example, only what they value themselves at. We'll have to wait for the IPO itself to see what everyone else values it at. That stake in Yahoo Japan might not be worth that much if they tried to unload it in one chunk to someone else. Then there's the normal conglomerate discount that we might apply. For there's various business and tax impediments in between Yahoo! selling something that it owns and that money actually being able to flow to shareholders.

Yet that discount does appear to be uncomfortably large. And that's where the mystery lies. That core business of Yahoo! is profitable (a good billion $ a year without extraordinary items) and so it ought to be worth a positive number, perhaps $10 to $15 billion on its own instead of that negative $8 to $10 billion. All of which is a bit of a headscratcher.

This has all been pointed out enough that the markets are well aware of it. But that discount between market value and theoretical value just doesn't seem to be shrinking. One slightly downbeat thought is that Yahoo! will be, when that Alibaba IPO happens, selling down 50% of its stake, or 12% of the entire Alibaba capitalisation. In fact, given that Alibaba is itself cash rich and is only intending to raise $1 billion directly it would be fair to say that the IPO is a method of enabling Yahoo! to cash in some of its stake more than it is anything to do with Alibaba's financing needs. The downbeat part of this is that Yahoo! will then have a vast pile of cash to spend, to either spend on expanding services and offerings by purchasing companies, or perhaps by sending a special dividend to shareholders. It's happened before and it will no doubt happen again (I recall what happened to GEC and there were those worried that it would happen to
Vodafone when it sold out of Verizon) that a cash rich company then wastes the money on bad acquisitions.

It's possible that this explains the discount to theoretical value. That the market thinks that Yahoo! does have that value, will get all that cash, but then won't do anything very useful with it. Which is, when you think about it, pretty downbeat.